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Functions of Commercial Banks in India

On September 24, 2014 By Anamika Sethi Category: Blog

Commercial Banks in India

Commercial banks provide banking services to businesses and consumers through a network of branches. These banks are in business to make a profit for their owners and they are usually public limited companies managed by shareholders. In India, however, most of the top commercial banks are owned by the government. But many private commercial banks have been established in the recent years.

Commercial banks are all-purpose banks that perform a wider range of functions such as accepting demand deposits, issuing cheques against saving and fixed deposits, making short-term business and consumer loans, providing brokerage services, buying and selling foreign exchange and so on.

The primary functions of commercial bank are accepting deposits from the public and granting credit to all sectors of the economy after making provisions for reserves as per the RBI regulations.

Apart from receiving and lending functions, commercial banks undertake various secondary or incidental functions such as agency services and general utility services.

Functions of Commercial Banks

The functions of commercial banks are explained below:

Primary functions

  • Collection of deposits
  • Making loans and advances

Collection of deposits: The primary function of commercial banks is to collect deposits from the public. Such deposits are of three main types: current, saving and fixed.

A current account is used to make payments. A customer can deposit and withdraw money from the current account subject to a minimum required balance. If the customer overdraws the account, he may be required to pay interest to the bank. Cash credit facility is allowed in the current account.

Savings account is an interest yielding account. Deposits in savings account are used for saving money. Savings bank account-holder is required to maintain a minimum balance in his account to avail of cheque facilities.

Fixed or term deposits are used by the customers to save money for a specific period of time, ranging from 7 days to 3 years or more. The rate of interest is related to the period of deposit. For example, a fixed deposit with a maturity period of 3 years will give a higher rate of return than a deposit with a maturity period of 1 year. But money cannot be usually withdrawn before the due date. Some banks also impose penalty if the fixed deposits are withdrawn before the due date. However, the customer can obtain a loan from the bank against the fixed deposit receipt.

Loans and advances: Commercial banks have to keep a certain portion of their deposits as legal reserves. The balance is used to make loans and advances to the borrowers. Individuals and firms can borrow this money and banks make profits by charging interest on these loans. Commercial banks make various types of loans such as:

  1. Loan to a person or to a firm against some collateral security;
  2. Cash credit (loan in installments against certain security);
  3. Overdraft facilities (i.e. allowing the customers to withdraw more money than what their deposits permit); and
  4. Loan by discounting bills of exchange..

Secondary functions

  • Agency services
  • General utility services

Agency Services: The customers may give standing instruction to the banks to accept or make payments on their behalf. The relationship between the banker and customer is that of Principal and Agent. The following agency services are provided by the bankers:

  1. Payment of rent, insurance premium, telephone bills, installments on hire purchase, etc. The payments are obviously made from the customer’s account. The banks may also collect such receipts on behalf of the customer.
  2. The bank collects cheques, drafts, and bills on behalf of the customer.
  3. The banks can exchange domestic currency for foreign currencies as per the regulations.
  4. The banks can act as trustees / executors to their customers. For example, banks can execute the will after the death of their clients, if so instructed by the latter.

General Utility Services: The commercial banks also provide various general utility services to their customers. Some of these services are discussed below:

  1. Safeguarding money and valuables: People feel safe and secured by depositing their money and valuables in the safe custody of commercial banks. Many banks look after valuable documents like house deeds and property, and jewellery items.
  2. Transferring money: Money can be transferred from one place to another. In the same way, banks collect funds of their customers from other banks and credit the same in the customer’s account.
  3. Merchant banking: Many commercial banks provide merchant banking services to the investors and the firms. The merchant banking activity covers project advisory services and loan syndication, corporate advisory services such as advice on mergers and acquisitions, equity valuation, disinvestment, identification of joint venture partners and so on.
  4. Automatic Teller Machines (ATM): The ATMs are machines for quick withdrawal of cash. In the last 10 years, most banks have introduced ATM facilities in metropolitan and semi-urban areas. The account holders as well as credit card holders can withdraw cash from ATMs.
  5. Traveler’s cheque: A traveler’s cheque is a printed cheque of a specific denomination. The cheque may be purchased by a person from the bank after making the necessary payments. The customer may carry the traveler’s cheque while travelling. The traveler’s cheques are accepted in banks, hotels and other establishments.
  6. Credit Cards: Credit cards are another important means of making payments. The Visa and Master Cards are operated by the commercial banks. A person can use a credit card to withdraw cash from ATMs as well as make payments to trade establishments.

In developing countries like India commercial banks perform certain promotional (developmental) activities. For example, nationalized banks in India provide credit to the top priority sectors of the economy such as agriculture, and small-scale and cottage industries. In this way commercial banks help to promote the socio-economic development of the country.

Related posts:

  1. What is Bank Rate?
  2. Indian Money Market
  3. Credit Cards: Meaning, Advantages and Disadvantages
  4. Major Differences between Debit and Credit Cards
  5. Sources of Industrial Finance in India
  6. Functions of NABARD
  7. Different Types of Banks in India
  8. What are Commercial Bills?
  9. Functions of Reserve Bank of India (RBI)

Category: Blog Tagged With: Banking

Related Posts

  1. What is Bank Rate?
  2. Indian Money Market
  3. Credit Cards: Meaning, Advantages and Disadvantages
  4. Major Differences between Debit and Credit Cards
  5. Sources of Industrial Finance in India
  6. Functions of NABARD
  7. Different Types of Banks in India
  8. What are Commercial Bills?
  9. Functions of Reserve Bank of India (RBI)

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